The Paris Club and International Debt Relief
Martin A. Weiss
Analyst in International Trade and Finance
February 17, 2012
Congressional Research Service
7-5700
www.crs.gov
RS21482
CRS Report for Congress
Pr
epared for Members and Committees of Congress
The Paris Club and International Debt Relief
Summary
The Paris Club is a voluntary, informal group of creditor nations who meet approximately 10
times per year, to provide debt relief to developing countries. Members of the Paris Club agree to
renegotiate and/or reduce official debt owed to them on a case-by-case basis. The United States is
a key Member and Congress has an active role in both Paris Club operations and U.S. policy
regarding debt relief overall. The Federal Credit Reform Act of 1990 stipulates that Congress
must be involved in any official foreign country debt relief and notified of any debt reduction and
debt renegotiation.
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Contents
Introduction...................................................................................................................................... 1
Background...................................................................................................................................... 1
Paris Club Terms.............................................................................................................................. 2
Classic Terms............................................................................................................................. 2
Houston Terms........................................................................................................................... 2
Naples Terms ............................................................................................................................. 3
Cologne Terms........................................................................................................................... 3
The Evian Approach ........................................................................................................................ 3
U.S. Participation............................................................................................................................. 4
Contacts
Author Contact Information............................................................................................................. 5
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The Paris Club and International Debt Relief
Introduction
The Paris Club is the major forum where creditor countries renegotiate official sector debts.
Official sector debts are those that have been either issued, insured, or guaranteed by creditor
governments. A Paris Club ‘treatment’ refers to either a reduction and/or renegotiation of a
developing country’s Paris Club debts. The Paris Club includes the United States and 18 other
permanent members, the major international creditor governments. Besides the United States, the
permanent membership is composed of Austria, Australia, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russia, Spain, Sweden,
Switzerland, and the United Kingdom. Other creditors are allowed to participate in negotiations
on an ad-hoc basis.
By contrast, the London Club, a parallel, informal group of private firms, meets in London to
renegotiate commercial bank debt. Unlike the Paris Club, there is no permanent London Club
membership. At a debtor nation’s request, a London Club meeting of its creditors may be formed,
and the Club is subsequently dissolved after a restructuring is in place.
The Paris Club does not exist as a formal institution. It is rather a set of rules and principles for
debt relief that have been agreed on by its members. To facilitate Paris Club operations, the
French Treasury provides a small secretariat, and a senior official of the French Treasury is
appointed chairman. The current Paris Club chairman is Jean-Pierre Jouyet, Under-Secretary of
the French Treasury. In addition to representatives from the creditor and debtor nations, officials
from the international financial institutions (IFIs) and the regional development banks are
represented at Paris Club discussions. The IFIs present their assessment of the debtor country’s
economic situation to the Paris Club. To date, the Paris Club has reached 405 agreements with 84
debtor countries. Since 1983, the total amount of debt covered in Paris Club agreements—
rescheduled or reduced—is approximately $505 billion.
Background
Since the first debt restructuring took place in 1956, the terms, rules, and principles of the Paris
Club have evolved to their current shape. This evolution occurred primarily through the G7/8
Summits.1 Five ‘principles’ and four ‘rules’ currently govern Paris Club treatments. Any country
that accepts the rules and principles may, in principle, become a member of the Paris Club. Yet
since the Paris Club permanent members are the major international creditor countries, they
determine its practices.
The five Paris Club ‘principles’ stipulate the general terms of all Paris Club treatments. They are:
(1) Paris Club decisions are made on a case-by-case basis; (2) all decisions are reached by full
consensus among creditor nations; (3) debt renegotiations are applied only for countries that
clearly need debt relief, as evidenced by implementing an International Monetary Fund (IMF)
program and its requisite economic policy conditionality; (4) solidarity is required in that all
creditors will implement the terms agreed in the context of the renegotiations; and (5) the Paris
1 The G8 Summit brings together the leaders of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom,
and the United States, annually, to discuss a wide range of political, social, and economic issues.
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The Paris Club and International Debt Relief
Club preserves the comparability of treatment between different creditors. This means that a
creditor country cannot grant more favorable terms to a debtor country a treatment on more
favorable terms than the consensus reached by Paris Club members.2
While Paris Club ‘principles’ are general in nature, its ‘rules’ specify the technical details of Paris
Club treatments. The ‘rules’ detail (1) the types of debt covered - Paris Club arrangements cover
only medium and long-term public sector debt and credits issued prior to a specified “cut-off”
date; (2) the flow and stock treatment;3 (3) the payment terms resulting from Paris Club
agreements; and (4) provisions for debt swaps.4
Since the Paris Club is an informal institution, the outcome of a Paris Club meeting is not a legal
agreement between the debtor and the individual creditor countries. Creditor countries that
participate in the negotiation sign a so-called ‘Agreed Minute.’ The Agreed Minute recommends
that creditor nations collectively sign bilateral agreements with the debtor nation, giving effect to
the multilateral Paris Club agreement. By recommending that the United States renegotiate or
reduce debts owed to it, congressional involvement is necessary to implement any Paris Club
agreement.
Paris Club Terms
There are four types of Paris Club treatments depending on the economic circumstances of the
distressed country. They are, in increasing degree of concessionality: Classic Terms, the standard
terms available to any country eligible for Paris Club relief; Houston Terms, for highly-indebted
lower to middle-income countries; Naples Terms, for highly-indebted poor countries; and
Cologne Terms, for countries eligible for the IMF and World Bank’s Highly Indebted Poor
Countries Initiative (HIPC). Classic and Houston terms offer debt rescheduling while Naples and
Cologne terms provide debt reduction.
Classic Terms
Classic terms are the standard terms for countries seeking Paris Club assistance. They are the
least concessional of all Paris Club terms. Debts are rescheduled at an appropriate market rate.
Houston Terms
Houston terms were created at the 1990 G-7 meeting in Houston, Texas so the Paris Club could
better accommodate the needs of lower middle-income countries. Houston terms offer longer
grace and repayment periods on development assistance than do Classic terms.
2 For more information on Paris Club principles and rules, see http://www.clubdeparis.org.
3 The flow treatment provides a method for the debtor country to progress through temporary balance of payments
difficulties. Stock treatment specifies what portion of a country’s ‘stock’ of debt is covered by the Paris Club
agreement.
4 A debt swap is a transaction in which a company, or in the case of the Paris Club, a country, exchanges debt for other
assets, such as foreign aid, equity, or local currency debt.
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Naples Terms
Naples Terms, designed at the December 1994 G-7 meeting in Naples, Italy, are the Paris Club’s
terms for cancelling and rescheduling the debts of very poor countries. Countries may receive
Naples terms treatment if they are eligible to receive loans from the World Bank’s concessional
facility, the International Development Agency (IDA). A country is eligible for IDA loans if it has
a per-capita GDP of less than $755. According to Naples Terms, between 50% and 67% of
eligible debt may be cancelled. The Paris Club offers two methods for countries to implement the
debt reduction. Countries can either completely cancel the eligible amount, and reschedule the
remaining debts at appropriate market rates (with up to 23-year repayment period and a six-year
grace period); or they can reschedule their total eligible debt at a reduced interest rate and with
longer repayment terms (33 years).
Cologne Terms
Cologne terms were created at the June 1999, G-8 Summit in Cologne, Germany.5 Cologne terms
were created for countries that are eligible for the World Bank and IMF 1996 Highly Indebted
Poor Countries Initiative (HIPC).6 They allow for higher levels of debt cancellation than Naples
Terms. Under Cologne terms, 90% of eligible debts can be cancelled.
The Evian Approach
On October 8, 2003, Paris Club members announced a new approach that would allow the Paris
Club to provide debt cancellation to a broader group of countries. The new approach, named the
“Evian Approach” introduces a new strategy for determining Paris Club debt relief levels that is
more flexible and can provide debt cancellation to a greater number of countries than was
available under prior Paris Club rules. Prior to the Evian Approach’s introduction, debt
cancellation was restricted to countries eligible for IDA loans from the World Bank under Naples
Terms or HIPC countries under Cologne terms. Many observers believe that strong U.S. support
for Iraq debt relief was an impetus for the creation of the new approach.
Instead of using economic indicators to determine eligibility for debt relief, all potential debt
relief cases are now divided into two groups: HIPC and non-HIPC countries. HIPC countries will
continue to receive assistance under Cologne terms, which sanction up to 90% debt cancellation.
(The United States and several other countries routinely provide 100% bilateral debt
cancellation.) Non-HIPC countries are assessed on a case-by-case basis.
Non-HIPC countries seeking debt relief first undergo an IMF debt sustainability analysis. This
analysis determines whether the country suffers from a liquidity problem, a debt sustainability
problem, or both. If the IMF determines that the country suffers from a temporary liquidity
problem, its debts are rescheduled until a later date. If the country is also determined to suffer
from debt sustainability problems, where it lacks the long-term resources to meet its debt
5 A list of all Paris Club debt reductions under Cologne Terms can be found online at http://www.clubdeparis.org/en/
countries/countries.php?TYPE_TRT=CO.
6 CRS Report RL33073, Debt Relief for Heavily Indebted Poor Countries: Issues for Congress, by Martin A. Weiss;
and CRS Report RS22534, The Multilateral Debt Relief Initiative, by Martin A. Weiss.
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obligations and the amount of debt adversely affects its future ability to pay, the country is
eligible for debt cancellation.
U.S. Participation
The United States began participating in Paris Club debt forgiveness in 1994, under authority
granted by Congress in 1993 (Foreign Operations Appropriations, §570, P.L. 103-87). Annually
reenacted since 1993, this authority allows the Administration to cancel various loans made by
the United States. These can include U.S. Agency for International Development (USAID) loans,
military aid loans, Export-Import Bank loans and guarantees, and agricultural credits guaranteed
by the Commodity Credit Corporation.
The procedure for budgeting and accounting for any U.S. debt relief is based on the method used
to value U.S. loans and guarantees provided in the Federal Credit Reform Act of 1990.7 The Act,
among other things, provides for new budgetary treatment of and establishes new budgetary
requirements for direct loan obligations.
Since passage of the act, U.S. government agencies are required to value U.S. loans, such as
bilateral debt owed to the United States, on a net present value basis rather than at their face
value, and an appropriation by Congress of the estimated amount of debt relief is required in
advance of any debt relief taking place. Prior to the passage of the act, neither budget authority
nor appropriations were required for official debt relief and bilateral debt (and other federal
commitments) were accounted for on a cash-flow basis, which credits income as it is received and
expenses as they are paid.
Determining the net present value is a complex calculation involving several factors, including
the terms of loan (whether it is concessional or at market rates), as well as the financial solvency
of the debtor and their likelihood of repayment. Following the passage of the act, a working group
of executive branch agencies, the Inter-Agency Country Risk Assessment System (ICRAS), was
created to maintain consistent assessments of country risk across the many U.S. agencies that
make foreign loans. ICRAS operates as a working group. The Office of Management and Budget
chairs ICRAS.8 The U.S. Export-Import Bank provides country risk assessments and risk rating
recommendations, which must be agreed on by all the ICRAS agencies. OMB is then responsible
for determining the expected loss rates associated with each ICRAS risk rating and maturity level.
Each sovereign borrower or guarantor is rated on an 11-category scale, ranging from A to F-.
Some analysts, including the Government Accountability Office (GAO), raise concerns about the
official process for estimating the cost of foreign loans to the United States, and thus the cost
needed to forgive U.S. debt.9 OMB’s current methodology uses rating agency corporate default
7 CRS Report 91-381, Statutory Authorities Related to Official Debt Relief, by Jeanne J. Grimmett (archived CRS
Report, available from author). See also, “Appendix IX: How the United States Budgets and Accounts for Debt Relief,”
in U.S. General Accounting Office, DEVELOPING COUNTRIES: Debt Relief for the Poorest, GAO/NSAID-00-161,
June 1, 2000, pp. 128-142.
8 For more information on ICRAS, see, “Appendix IV: Interagency Country Risk Assessment System,” in U.S.
Government Accountability Office, EXPORT-IMPORT BANK: OMB's Method for Estimating Bank's Loss Rates
Involves Challenges and Lacks Transparency, GAO-O4-531, September 2004, pp. 76-78.
9 U.S. Government Accountability Office, EXPORT-IMPORT BANK: OMB's Method for Estimating Bank's Loss Rates
Involves Challenges and Lacks Transparency, GAO-O4-531, September 2004.
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data and interest rate spreads in a model it developed to estimate default probabilities and makes
assumptions about recoveries after default to estimate expected loss rates. According to GAO, the
method that OMB employs may calculate lower loss rates than may be justified for the sovereign
debt of emerging economies.
In 2004, GAO recommended that the Director of OMB provide affected U.S. agencies and
Congress with technical descriptions of its current expected loss methodology and update this
information when there are changes. GAO also recommended that the OMB Director arrange for
independent review of the methodology and ask U.S. international credit agencies for their most
complete, reliable data on default and repayment histories, so that the validity of the data on
which the methodology is based can be assessed over time. In their response, OMB made no
commitment to increase transparency or engage the private sector rating community.
Author Contact Information
Martin A. Weiss
Analyst in International Trade and Finance
mweiss@crs.loc.gov, 7-5407
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